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A macroeconomic approach to optimal unemployment insurance: theory

Landais, Camille, Michaillat, Pascal and Saez, Emmanuel (2018) A macroeconomic approach to optimal unemployment insurance: theory. American Economic Journal: Economic Policy, 10 (2). pp. 152-181. ISSN 1945-7731

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Identification Number: 10.1257/pol.20150088

Abstract

This paper develops a theory of optimal unemployment insurance (UI) in matching models. The optimal UI replacement rate is the conventional Baily-Chetty replacement rate, which solves the tradeoff between insurance and job-search incentives, plus a correction term, which is positive when an increase in UI pushes the labor market tightness toward its efficient level. In matching models, most wage mechanisms do not ensure efficiency, so tightness is generally inefficient. The effect of UI on tightness depends on the model: increasing UI may raise tightness by alleviating the rat race for jobs or lower tightness by increasing wages through bargaining.

Item Type: Article
Official URL: https://www.aeaweb.org/journals/pol
Additional Information: © 2018 American Economic Association
Divisions: Economics
Subjects: H Social Sciences > HB Economic Theory
Sets: Departments > Economics
Date Deposited: 12 Jun 2018 11:03
Last Modified: 20 Sep 2019 00:10
Projects: ES/K008641/1
Funders: Economic and Social Research Council, University of California, British Academy, Institute for New Economic Thinking, Sandler Foundation
URI: http://eprints.lse.ac.uk/id/eprint/88304

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